The historic repopulation of UK city centres lifts rents more than prices

July 23, 2018Article by Paul Avery

Following an extended period of suburban supremacy in the second half of the 20th century, the city centre has been reclaimed as a supremely desirable place to live, work, and spend leisure time.

In a new piece of research, the Centre for Cities describes the proliferation of swanky apartments, trendy bars, student haunts, and underground gyms in UK town centres as ‘a dramatic urban renaissance and a shift in how people want to live.’

Population data bear out this trend emphatically, with many city centres doubling in size since the millennium, while the population of the UK as a whole has increased by just 10%.

According to the new study, Liverpool boasts the nation’s fastest-growing urban centre with an 181% population increase between 2002 and 2015. Hot on its heels are Birmingham (163%), Leeds (150%), Manchester (149%), and Bradford (146%).

Growth rates are of course relative to the prior populations of these places, so while London’s 58,500 new residents represent a casual 22% increase, Bradford’s heady 146% expansion is due to a comparatively modest net inflow of 1,900 people.

Although that is not a huge number, relative to an existing population size of 1,300, it has made a considerable impact – bringing with it a flurry of urban regeneration projects like the revamped City Park and central Westfield shopping centre, and coinciding with annual economic growth 42% greater than the nationwide average.

Who and what is behind this shift?

Historically, urbanisation is fundamental to the formation of productive and prosperous societies – bringing ideas, money, and labour into constant collision with one another, and slashing time wasted in travel.

The UK’s present re-urbanisation is fuelled by those same economic and lifestyle benefits, in combination with a swing of the pendulum back from the suburbs where the uncool parents of the millennial generation tended to settle.

Revitalised city centres can thank young professionals, whose presence there has tripled in the first decade of this century to the extent that 20-29-year-olds now make up around half of the resident population.

They are drawn primarily to employment opportunities: Manchester offered 84% more city centre jobs in 2015 than 1998 and enjoyed 149% population growth, while Blackpool saw the number of jobs decline by 13% over a slightly shorter period and experienced a 6% fall in population.

Students are making an equally big splash (beyond the splash of weeknight chunder on cobblestones): there were three times as many of them living in Sheffield city centre between the 2001 and 2011 censuses, with similar spawning events occurring across the country.

Like young professionals, students come for the work and stay for the good times. Hence the sprouting of all kinds of amenities – from convenience supermarkets to newly-fashionable crazy golf joints – which in turn attract more city slickers demanding yet more facilities and entertainments.

More jobs, better buzz, and new amenities are of course powerful drivers of demand for housing.

The impact on house prices

Urbanisation supercharges property markets (for the clearest modern example, look at what is happening in Africa’s dynamic megacities), so this pattern of decisive re-urbanisation ought to be a gift to investors in UK city centres.

In order to find out, we have appended some additional layers of data to the Centre for Cities study: average apartment price growth over the same period, and rental growth since 2011, for each city at the top and the bottom of the population change ranking.

Comparing capital appreciation in the ten fastest-growing city centres with the slowest ten, produces a surprising conclusion: property prices in the top ten have indeed doubled, but so have almost all in the bottom ten.

House price growth is clearly much more consistent across the country than city centre population growth, as can be seen in the chart below, in which a seeming correlation among the population growers vanishes completely for the non-growers.

Average price growth in the fastest growing cities since 2002 is 132%, compared with a very respectable 123% for the bottom ten, suggesting that central population growth has a negligible effect on house prices over time – or at least an effect that is flattened out by a corresponding increase in housing supply.

The post-industrial northern towns that dominate this ranking contain troves of brownfield sites (often with characterful historic building shells) that are ripe for development – permitting limitless population growth, though in some cases supressing property values with boundless new building.

Contrastingly, Cambridge registered the second highest price and rental growth of all cities listed here, yet it contains the city centre in sharpest decline. Rather than a growing population causing price appreciation (as throughout the top ten), Cambridge’s overly-fast value growth, combined with the space restraints of its historic centre, has squeezed affordability so much that the population appears to have fled to commutable suburbs or cheaper alternative locations.

These caveats aside, had you invested in all of these places, your profits would be much greater in the top ten, where average appreciation over the period was £72,283, compared with £45,142 for the bottom ten (after excluding outlier Cambridge, which saw prices rocket by £178,114 – nearly six times as much capital gains as were up for grabs in Burnley).

So far, so inconclusive. But things get a bit more interesting when you compare population growth with rental prices.

The impact on rents

Rents have risen by an average of 19% in the UK’s fastest-growing city centres since 2011 – more than double the 9% growth registered in the slowest-growing, where there were in fact two instances of declining rents.

Considering that three-quarters of the 20-29-year-olds who make up half of all city centre residents live in private rented flats, it makes sense that their going forth and multiplying has had a greater impact on the price of renting than on home values (although high rents of course also attract investors).

The rate of increase for property values is on average 8% higher in growing city centres than in stagnant ones. But the rate of increase for rents is 98% higher in those cities.

So while capital appreciation remains a toss-up (you might even say a guarantee looking at the past decade), it is abundantly clear that for investors focused on yield, fast-growing urban centres are the far stronger bet.

The Centre for Cities defines city centres as an 0.8-mile radius from the centre of places with 550,000 to 4m residents, and a 0.6-mile radius from the centre of those with 135,000 to 550,000 residents.

Unfortunately, it is not possible to drill down to that level of detail for property market metrics, so we used the prices of flats across the whole of each city as a rough proxy for urban accommodation, and compared the average rents of 1-bedroom properties, which overwhelmingly tend to be flats and are as or more likely than any other unit size to be located in city centres.

While the urbanisation figures refer to the period 2002-2015, house price and rental data extend to the present day, and so have been included through to 2018. The house price data refers to the period 2002-2018. However, average rental prices for all cities have only been published since 2011, so the rental data is for the period 2011-2018.

Birkenhead, 8th from the bottom of the ranking of fast-growing cities, is not a distinct local authority nor measured as such by Land Registry, so it is not included in this analysis.

Author

Paul Avery

Paul joined us in 2016 to lead our in-house research efforts, producing reports and guidance for clients as well as the strategic market analysis behind our new project launches. His background is in sustainability in the construction sector, and he is currently being trained in property valuation to further bulk up his investment creds.